E-commerce stocks that have corrected sharply in recent weeks, but remain attractive long-term investments as consumer buying habits have been reshaped by the pandemic.
Coupang (CPNG): Has shown healthy growth to sustain with encouraging long-term guidance for adjusted EBITDA.
Sea Limited (SE): Relative deceleration in growth and cash burn are concerns. However, multi-year tailwinds in an attractive Southeast Asian market.
JD.com (JD): Possibly the top pick from China’s e-commerce stocks. A strong logistics network allows penetration into tier two and three cities.
Etsy (ETSY): Growth in active buyers and sellers remains robust. International markets will support growth along with sustained upside in GMS per active user.
Since the onset of the Covid-19 pandemic, e-commerce stocks have trended higher. With social distancing mandated globally, shoppers and sellers went online. E-commerce experienced a historic 34.2% surge in activity in 2020. Therefore, the rally in the sector was backed by positive fundamental developments.
However, there have been several other factors that have affected e-commerce stocks. Chinese e-commerce stocks trended lower as regulatory headwinds dominated sentiments. In the recent past, some e-commerce stocks plunged on growth deceleration, in particular, with the growth outlook likely to be revised in the post-pandemic era.
While these are near-term factors weighing on stock sentiment, the long-term outlook is robust. It’s expected that the global e-commerce market will be worth $5.55 trillion in 2022. Online sales are likely account for 21% of total retail sales in the year. This is only expected to improve in the next few years. By 2025, the e-commerce market share is expected to increase to 24.5%.
Therefore, the long-term outlook is positive for e-commerce stocks. With a deep correction in several stocks in the sector, there seems to be an attractive accumulation opportunity.
A close-up shot of a Coupang (CPNG) delivery vehicle.
Source: Ki young / Shutterstock.com
South Korea’s Coupang (NYSE:CPNG) stock has been on a sustained correction mode with a decline of over 50% in the last six-months. I believe that the stock is poised for a reversal from current levels.
From an industry perspective, Coupang believes that the Korean e-commerce market will swell to $291 billion by 2025. This will provide Coupang ample scope for growth.
Even with these positives, CPNG stock has been in a downtrend for two reasons.
One, for 2021, Coupang reported revenue growth of 54% on a year-on-year basis. The stock has discounted relative deceleration in growth.
And, two, Coupang reported adjusted EBITDA loss of $357 million in 2020. Losses widened to $747 million in 2021.
I believe that the sharp correction has more than discounted growth concerns. Coupang has also guided for an improved adjusted EBITDA loss of $400 million for 2022. Additionally, the company believes that it’s positioned for long-term EBITDA margin of 7% to 10%.
Entry into new geographies is another factor that can help in accelerating growth. Overall, it seems that the correction in CPNG stock is overdone and is among the top e-commerce stocks to consider.
Sea Limited
SEA Limited - Shopee app on mobile phone
Source: Muh.Imron / Shutterstock.com
Sea Limited (NYSE:SE) is another e-commerce stock that has been punished by investors. In the last six-months, the stock has slumped by almost 75%.
Growth and profitability concerns are the key factors for the sell-off of the Singapore-based company. For the digital entertainment segment, Sea reported adjusted EBITDA of $2.8 billion for 2021. However, the company’s quarterly active and paying users declined in Q4 2021. This has concerned the markets.
In the e-commerce segment, adjusted EBITDA loss was $2.6 billion. Losses have completed offset the gains from the digital entertainment segment. While revenue growth was robust at 136.4%, the company has guided for lower growth of 75.7% for 2022.
While these are legitimate concerns, the markets seem to have over-reacted. Sea Limited has strong presence in one of the fastest growing e-commerce markets. If the company can control cost and achieve EBITDA level profitability, SE stock is poised to surge higher. Recently, the company decided to exit its e-commerce unit in India.
Focus on few growth markets with high-growth visibility is likely to help in cost cutting.
The company has guided for 155.4% revenue growth in the digital financial services segment. However, the segment is also in an EBITDA level loss.
Overall, profitability is a concern for Sea Limited along with deceleration in growth in the digital entertainment segment. However, it’s too early to write-off the company and there seems to be value below $100.
JD.com, Inc. (JD)
JD stock
Source: Michael Vi / Shutterstock.com
If I had to pick one name from Chinese e-commerce stocks, it would JD.com (NASDAQ:JD) stock. In the last 12-months, Alibaba Holdings (NYSE:BABA) stock has declined by 63%. During the same period, JD stock has corrected by 30%. The out-performance is a clear indication of the edge the company has in the current market and regulatory scenario.
Recently, JD.com announced that it will be considering a special dividend. One Citigroup analyst believes that the decision shows the company’s confidence in its long-term prospects. Analyst Alicia Yap has a price target of $97 for the stock. This would imply an upside potential of 81% from current levels of $53.7.
In terms of business segment, JD Retail remains the cash-cow for the company. Also, the company has continued to gain market share in the JD Logistics business.
As a matter of fact, the company’s logistics network is the best among e-commerce companies in China. The company has presence in almost all counties and districts in China. This gives JD.com scope for penetration into tier two and three cities.
It’s worth noting that for 2021, JD.com reported free cash flow of 26.2 billion renminbi ($3.96 billion). The financial flexibility allows the company to make investments in new businesses.
Overall, JD stock looks attractive for long-term investors. I would not be surprised if the stock doubles in the next 12-24 months.
Etsy, Inc.
etsy logo on a grey wall
Source: quietbits / Shutterstock.com
Like most e-commerce stocks, Etsy (NASDAQ:ETSY) has also declined by almost 60% in the last six-months. At current levels of under $95 a share, the stock looks picture perfect.
Recently, Stifel analyst Scott Devitt cut the price target for Etsy stock from $200 to $160. Even after the downgrade, the stock still has an upside potential of 57%.
In terms of positives, Etsy reported healthy growth in active buyers and sellers for the year ended December 2021. Further, the share of non-U.S. gross merchandise sales increased to 42% in 2021 as compared to 36% in 2020. With a wider addressable market, the company seems positioned for revenue and EBITDA growth.
Another important point to note is that the gross merchandise sales (GMS) per active buyer was $100 in Q4 2018. In the last quarter, the GMS per active buyer swelled to $136. If this growth sustains, there is visibility for EBITDA margin expansion and cash flow upside. Etsy has also witnessed sustained growth in repeat buyers and habitual buyers on the platform. These are all positive metrics are the long-term.
For Q4 2021, Etsy reported operating cash flow of $290.5 million. This would imply an annualized OCF potential of $1.2 billion. Etsy also has $1.1 billion in cash. Strong financial flexibility allows the company to invest in sales, marketing and product development.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.
